Income Tax

Timely Payments for MSMEs: A Look at Section 43B(h) of the Income Tax Act

April 10, 2024
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Section 43B(h) of Income Tax Act, 1961

Micro, Small and Medium Enterprises (MSMEs) are the lifeblood of the Indian economy. They generate employment, contribute significantly to GDP, and foster innovation. However, delayed payments from larger companies can cripple their cash flow and hinder growth. To address this challenge, the Indian government introduced a landmark provision – Section 43B(h) of the Income Tax Act, 1961.

How it Works:

Section 43B(h) establishes a crucial link between tax deductions and timely payments to MSMEs. Businesses can no longer claim tax deductions for expenses incurred on goods or services purchased from MSMEs if the payments are delayed beyond the timeframe mandated by the Micro, Small and Medium Enterprises Development Act (MSMED Act). This timeframe is 15 days without a written agreement and a maximum of 45 days with a written agreement between the buyer and seller.

Benefits for MSMEs:

  • Improved Cash Flow: By incentivizing businesses to settle dues within the stipulated period to avail tax benefits, Section 43B(h) injects a much-needed shot of liquidity into MSME operations. Faster access to payments strengthens their financial footing and allows them to reinvest in growth initiatives.
  • Enhanced Bargaining Power: The provision empowers MSMEs to negotiate payment terms with greater confidence. They can now confidently push for deadlines aligned with the legal framework, knowing that delayed payments will have tax implications for the buyer. This strengthens their position in the business ecosystem.
  • Reduced Financial Stress: Delayed payments often lead to a domino effect of financial stress for MSMEs. They may struggle to meet operational costs, pay employees, or fulfill credit obligations. Section 43B(h) mitigates this stress by promoting a culture of prompt payments, fostering financial stability for MSMEs.

Wider Impact: The positive effects of Section 43B(h) extend beyond individual MSMEs. By ensuring timely payments, it contributes to the overall health and growth of the MSME sector. A financially robust MSME sector leads to increased employment opportunities, boosts innovation, and strengthens the Indian economy as a whole.